Taxes for Sole Proprietors May Increase in the Czech Republic

In the Czech Republic, four out of five sole proprietors currently pay no more than 100 crowns a month in income tax. Economists from PAQ Research and the Institute for Labour and Social Affairs (RILSA) argue that it’s time to rethink this setup. Adjustments to the lump-sum tax regime and a reduction in flat-rate expenses could generate up to 25 billion crowns annually for the state, they estimate.

The notably lower tax burden for sole proprietors compared to employees continues to draw criticism from government officials and business leaders. And whenever the state begins searching for new sources of revenue, sole traders are often the first to come under scrutiny. According to these economists, the current tax treatment of self-employed individuals is no longer fair. Yet, despite years of discussion, no government has dared to touch the flat-rate expense system or revise the lump-sum tax. But economist Vladimír Bezděk believes that the time has come to change that.

“When a brand-new tax system was introduced in the early 1990s, amid the broader economic transformation, it made sense to offer strong support to sole proprietors — they symbolized economic freedom and flexibility in the emerging market economy. The goal of building a large segment of independent entrepreneurs was achieved. But now, three decades later, we face very different economic and fiscal challenges,” says Bezděk, who currently serves as an economic advisor to the president.

In a comprehensive analysis of how self-employment functions within the Czech tax system, PAQ Research and RILSA concluded that the current tax model is outdated and disproportionately benefits high-earning freelancers — particularly in white-collar professions — over employees and lower-income entrepreneurs with higher costs.

The inequality becomes especially clear when comparing a well-paid IT specialist working as a sole proprietor versus one employed by a company. A freelancer earning around CZK 93,000 per month with low actual expenses benefits significantly from the lump-sum tax scheme, paying just CZK 8,716 a month.

But if that same IT expert were employed full-time, their income tax and insurance contributions would add up to roughly CZK 35,000 — not including the employer’s additional payments to the state. In total, the tax burden would be nearly four times higher than that of a freelancer.

“Self-employed people are the backbone of our economy. They take on full responsibility for their business and face risks that salaried employees simply don’t. Comparing their tax obligations to those of regular employees isn’t just inaccurate — it’s deeply unfair,” argues Jiří Nekovář, a tax advisor at BDO and former head of the Chamber of Tax Advisors.

Still, the data tells a striking story. According to the study by Petr Vilím and Filip Pertold, around 78% of Czech sole proprietors whose primary income comes from self-employment pay no more than 100 crowns per month in personal income tax.

The Czech Republic — A Paradise for Sole Proprietors?

The notion that sole proprietors in the Czech Republic enjoy a lighter tax burden isn’t just anecdotal — it’s backed by hard data. According to Eurostat, self-employed individuals paid a total of 94 billion CZK in taxes and insurance contributions in 2023. That’s just around 8% of the country’s total labor-related deductions, which amounted to 1.2 trillion CZK. When you compare contributions per person, the gap is even more striking: the average deductions paid by the 1.1 million sole proprietors are less than half of what employees contribute.

And the Czech Republic isn’t just lenient on taxes — it’s also leading the way in terms of self-employment. For every four employees, there is one sole proprietor. This puts the country among the top in Europe when it comes to the proportion of self-employed workers, fourth overall, and the highest among industrialized economies.

According to the authors of the study, this signals that the environment for sole proprietors may be disproportionately favorable. They suggest it’s time to reassess whether the current system reflects the realities and needs of today’s economy.

High Expense Rates – Lower Tax Revenue for the State

So what exactly makes self-employment so advantageous, according to the economists? The key lies in lump-sum expense deductions. Instead of collecting and documenting every invoice and receipt, entrepreneurs in the Czech Republic can simply deduct a flat-rate percentage of their income as expenses, significantly reducing their taxable base.

This flat-rate system is extremely generous, both compared to other countries and the Czech Republic’s past. For example, lump-sum deductions like these don’t exist at all in countries like Germany or Poland. Meanwhile, Czech tradespeople and farmers can deduct up to 80% of their income, and professionals such as consultants or IT specialists can write off 60%. After applying these deductions, both taxes and insurance contributions are calculated on a much smaller remaining base.

A survey of around 1,400 sole proprietors — cited in the study — confirmed a long-suspected reality: actual expenses are often much lower than the generous lump-sum allowances. The biggest gap is found among sole proprietors in office-based professions. These individuals usually have minimal operational costs — primarily software and basic equipment — yet still claim the full 60% deduction.

According to the study, the actual expenses of these entrepreneurs are often only around a quarter of the amount they deduct. For instance, a typical office-based sole proprietor earning CZK 600,000 per year and using the 60% lump-sum method deducts CZK 360,000 as expenses. That leaves a taxable base of CZK 240,000 — even though their actual profit is closer to CZK 500,000 after subtracting real costs of just 16%.

In light of this imbalance, the reform authors propose lowering the flat-rate deductions for all sole proprietors, especially those in office-based professions. For them, the suggestion is to reduce the lump-sum deduction from 60% down to 30%.

The Flat Tax: A Unique Feature of the Czech Republic

Even more advantageous than lump-sum deductions, the flat tax system is a major benefit for some sole proprietors. Nearly 120,000 Czech freelancers currently use this alternative scheme, which allows them to pay income tax, health insurance, and social security in one simplified monthly payment — as long as their income doesn’t exceed a certain threshold.

This system not only reduces administrative burdens but can also result in substantial financial savings. With a relatively low monthly payment — typically CZK 8,716 — sole proprietors with high incomes and minimal expenses can bring their effective tax rate (including insurance contributions) down to just 7%.

The flat tax is almost unheard of in Central Europe. Similar regimes once existed in Poland and Hungary, but due to widespread tax optimization, they were either abolished or significantly tightened.

Take, for example, a typical office-based sole proprietor earning CZK 1.2 million in annual profit. Under the flat tax, they would pay around CZK 105,000 annually — roughly 9% of their actual profit. If they opted for the lump-sum deduction method instead, they would owe about CZK 80,000 more. And if they reported real expenses, their total tax liability could rise by nearly CZK 320,000 compared to the flat tax scheme.

Economists are now calling for reforms. They propose raising the monthly flat tax payment to CZK 9,842 — aligning it with the tax burden of employees earning the minimum wage. They also suggest lowering the income ceiling for eligibility, reducing it from CZK 2 million back to CZK 1 million, as it was before 2022.

Importantly, they argue that the flat tax option should remain available only to freelancers who handle large volumes of paperwork — such as those in hospitality, retail, trades, and agriculture — where receipts, invoices, and cash transactions make oversight more complex.

According to the study, these reforms would increase contributions for around 60% of all sole proprietors, while 36% — primarily those with lower incomes — would see their contributions decrease. In total, the proposed changes could generate up to CZK 25 billion annually. They would also help curb the widespread use of the Schwarz system, under which an estimated 100,000 people currently work, and bring more balance to the labor market.

Conclusion: A Time for Tax Reform — and Thoughtful Guidance

The Czech tax system has long provided favorable conditions for sole proprietors — from generous lump-sum deductions to a unique flat tax regime. While these measures once served to promote entrepreneurship and economic independence, today’s economic realities are different. With growing pressure on public finances and increasing disparities between the tax burdens of employees and freelancers, the debate on reform is both timely and necessary.

Economists and policy experts agree: the current model disproportionately benefits high-income freelancers in office professions while placing a heavier load on employees. Proposed changes — such as reducing lump-sum deduction rates, tightening eligibility for the flat tax, and adjusting monthly contributions — aim to create a fairer and more balanced system.

If you’re a sole proprietor in the Czech Republic, now is the time to evaluate how these potential changes could affect your business. Whether you’re just starting out or already established, the right tax strategy can save you money, prevent future liabilities, and ensure compliance with evolving regulations.

At 360WEDO, our tax consultants in the Czech Republic are ready to help you make sense of the changes, optimize your tax obligations, and secure the most favorable setup for your business. Contact us for a personalized consultation, and stay one step ahead of the curve.

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